While the state is feeling the pain of pension costs, which make up 5 percent of the budget, it's at the local level – where the costs are typically twice that percentage or more - that spiraling costs could have the most dramatic effect.

Anaheim, which has a general fund budget of $252 million, spent $56 million on pensions in 2010, and that number could go up by half over the next four years, as pension funds start recognizing losses from the stock market collapse of 2008 and 2009.

"Our pension costs have skyrocketed," Mayor Tom Tait said recently. "And will continue to grow and consume revenues that would otherwise go to providing essential city services."

In Los Angeles, one of every $3 of city money is expected to go to pensions by 2015. By that year in Costa Mesa, pension costs are expected to consume around 30 percent of the budget, so the City Council decided last month to start privatizing government.

Two experts, one a member of the state's independent actuarial board, are projecting an increase in municipal pension costs in California of 50 percent to 100 percent over the next four years.

At that level, cuts to services such as police, fire, libraries, parks and roads are unavoidable, experts say.

That's especially true for older cities with a lot of retired workers, their own police and fire departments, or shrinking revenues. That description applies in varying degrees to Anaheim, Brea, Costa Mesa, Fountain Valley, Fullerton, Garden Grove, Huntington Beach, Newport Beach, Orange and Santa Ana, although some of those cities have better revenues and reserves than others.

Many of the newer south county cities haven't been in existence long enough to have many retirees or pension liabilities.

Those liabilities, said Kris Vosburgh, executive director of the Howard Jarvis Taxpayers Association, "are sucking everything into a giant black hole, and unless there is action yesterday, we are not going to escape some very negative consequences."

THE PROBLEM

From 2007 to 2009, CalPERS went from $251.1 billion in assets to $178.9 billion, but cities won't start to feel that sting for a few more months because of the fund's accounting practices.

CalPERS notes that it has gained $70 billion in the 20 months since the fund's low point, and that it's almost 70 percent funded now.

The public employee unions have been pointing to a recent article by McClatchy Newspapers that looks at pension spending across the country and concludes that at 2.9 percent of the average state budget, it isn't a major burden.

The Little Hoover Commission concludes that costs will be up to 80 percent higher in five years. "Barring a miraculous market advance and sustained economic expansion, no government entity – especially at the local level – will be able to absorb the blow without severe cuts to services," it wrote.

Miller has calculated what sort of "miraculous market advance" would be needed to get CalPERS out of the hole: a seven-year economic boom, with the Dow growing 12 percent a year to reach an index of 25,000.

HEAVY OBLIGATIONS

For most of its history, CalPERS was well-funded. But generous retroactive benefits introduced across the state a decade ago caused a surge in liability; at the same time, two recessions kept investment returns for the decade to just 4.5 percent.

Over the decade, city workers saw pay raises of 60 percent; police and firefighters got raises of 69 percent, while their numbers increased by 21 percent.

That has increased statewide local payroll costs by 84 percent in 10 years (inflation for the period was 26.6 percent), creating an enormous gap between what cities will have to pay their workers when they retire, and the money they've set aside to do so.

Anaheim, for example, has $1 billion in the pension fund, but its liabilities are $1.7 billion, "and that's assuming we don't hire anyone else and there are no future raises," said Tait, the city's mayor.

Despite a total budget of $1.3 billion, Anaheim is down to its last few million dollars in general fund reserves, and running a deficit. Tait said he hopes to avoid layoffs by "spreading the pain."

That could be difficult. A 50 percent increase in pension contributions for Anaheim would be $28 million. The budget crunch has Anaheim looking to combine fire departments with Fullerton and Orange.

Garden Grove's total pension liability more than doubled from 2005 to 2009, going from $51 million to $104 million, despite the $15 million the city pays yearly. In those four years, the assets to pay its safety workers grew by $59 million, but liabilities shot up $91 million.

"We've cut about $20 million since I've been a council member and we have another $20 million coming,'' said City Councilman Devin Dwyer.

Rising pension costs could mean another $10 million on top of that.

Costa Mesa was in a worse situation, with $130 million in unfunded liability, compared with a $93 million budget that had already been stripped of almost everything but payroll.

The city's budget director projected pension costs growing from $15 million to $25 million by 2015, but local union representatives have disputed the number.

"As far as we can tell, they're a wild guess by the city," said Jennifer Muir, a spokeswoman for the Orange County Employees Association. "Their projected pension costs have not been confirmed by CalPERS actuaries, and the city has failed to offer any information regarding how its projections were calculated."

Rancho Santa Margarita, Fountain Valley, Newport Beach and Costa Mesa have created a second, lower tier of pension benefits for new hires.

A second tier is not enough, according to the commission, because it only deals with problems 30 years away.

THE LAW

What's needed, the commission said, is for the Legislatureto allow cities to cut prospective pension benefits of current employees.

In California, the law on public pensions has been determined entirely by the courts, as the Legislature has never passed a law establishing pension rights, said Amy Monahan, a law professor at the University of Minnesota.

The common understanding of court rulings is that benefits in place when someone is hired can never be cut, but that doesn't mean that's actually the law, Monahan said.

"The bottom line is that no one's tried to challenge it," she said. "The only way it changes is if a state or municipality says, 'We're going to go ahead and do this and see if anyone sues us.'"

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